Financial Statements are Prepared Primarily in Accounting

Financial statements are prepared primarily for decision making. They play a dominant role in setting the framework of managerial decisions. But the information provided in the financial statement is not an end in itself as no meaningful conclusions can be drawn from these statements alone. However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial statements. Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing a relationship between items of the balance sheet and profit and loss account.

The term financial analysis is also known as analysis and interpretation of financial statements, refers to

the process of determining the financial strength and weaknesses of the firm by establishing a strategic relationship between the items of the balance sheet, profit and loss, and other operative data. The purpose of financial analysis is to diagnose the information contained in financial statements so as to judge the profitability and financial soundness of the firm. Just like a doctor examines his patient by recording his body temperature, blood pressure, etc. before making his conclusion regarding the illness and before giving his treatment, a financial analyst analysis the financial statements with various tools of analysis before commenting upon the financial health or weaknesses of an enterprise. The analysis and interpretation of financial statements are important to bring out the mystery behind the figures in financial statements. Financial statement analysis is an attempt to determine the significance and meaning of the financial statement data so that forecast may be made of the future earnings, ability to pay interest and debt maturities, and profitability of a sound dividend policy. The term financial statement includes both analysis and interpretation. A distinction should therefore be made between two terms. While the term analysis is used to mean the simplification of financial data by methodical classification of the data given in the financial statements, interpretation means explaining the meaning and significance of the data so simplified. However, both analysis and interpretation are interlinked and complementary to each other.